Equilibrium Asset Pricing in Directed Networks
47 Pages Posted: 26 Sep 2018 Last revised: 21 Feb 2019
Date Written: 2018
Directed links in cash flow networks affect the cross-section of price exposures and market prices of risk in equilibrium. In an asset pricing model featuring mutually exciting jumps, we measure directedness through an asset's shock propagation capacity (spc). In the model, we prove: (i) Cash flow shocks of high spc assets command high market prices of risk, (ii) the price reaction of an asset to its own cash flow shocks is less pronounced for high spc assets. To illustrate our theoretical findings, we estimate an empirical network from industry cash flows and find support for these predictions.
Keywords: directed cash flow networks, directed shocks, mutually exciting processes, recursive preferences
JEL Classification: G01, G12, D85
Suggested Citation: Suggested Citation